If you form an LLC, then you have the advantage of personal asset protection. This is often the main reason small business owners decide to incorporate.
However, this protection assumes that your personal assets are separate from your LLC. If your assets are one and the same, you’ll forfeit that protection. Thankfully, separating your assets is not hard. With a little time and these six steps, you can separate your business and personal finances.
1) Establish Business Bank Accounts
As soon as you create your LLC, you should establish a business bank account. This includes getting a checking account, a credit card, a debit card, business checks, and more.
To get an account, you usually need to have a copy of your operating agreement (especially for multi-member LLCs). If you don’t have one yet, you can learn how to create one here.
While getting an account is relatively simple, you may want to consider a few options. For one, if you get a business bank account from the same bank that holds your personal accounts, your cards might look very similar. Many banks allow you to customize the face of your card. The small fee to do so could save you the hassle of correcting a transaction later on.
Establishing a line of credit is not mandatory, but you may find it useful. As you make payments on time and establish a good score for your business, getting loans becomes easier. Starting out, you may have to personally guarantee any loans you get (which you want to avoid as much as possible). LLCs with established credit can often avoid these personal guarantees.
2) Sign Documents Correctly.
Any professional knows that writing checks and signing contracts is all part of doing business. But writing a check for your business is different from a personal check. You’ll need to do more than simply sign your name; you should make it clear that your business is the legal guarantor of that document. You can do so by signing your name, your office or role in the business, and the name of the business itself.
The same applies for any other contracts you enter. This process ensures that you are not held personally responsible for the contract–the business is. You are merely signing on behalf of the business.
Of course, the opposite applies for your personal expenses and contracts: sign as yourself. Distinguishing these signatures protects you from unnecessary personal liability.
3) Maintain Accurate, Up-to-date Business Records.
Record-keeping seems like a hassle, but it is vital to running a compliant business. You need to maintain an accurate record for your business’s finances. This record will prove that your business finances have been kept separate from your personal accounts.
A good business accounting software can facilitate your record-keeping. As part of the process, you’ll need to keep receipts and record the transactions they contain. You can keep paper or electronic copies, but the copies of receipts will prove your record. They’re also helpful for tax season, too.
Within your record, you’ll want to include all of the LLC’s own transactions. This includes sales, purchases, investments, returns, refunds, and more. If it’s a finance-related aspect of your business, you should keep a record of it.
In addition, you should keep a careful record of any and all fund transfers between the LLC and your members. This includes when a member gives money to the LLC, like an investment. It also applies to all distributions of profits to the members. You should record these transfers even if you are a single-member LLC.
Distributions and transfers between members and the LLC is the most common way businesses commit fraud. And if your business is fraudulent, your personal assets can be at risk. A good record keeps these transactions transparent, so you are more protected from fraud.
4) Track Business Usage of Personal Items.
In general, you should keep your personal belongings separate from your business and vice versa. For example, if you operate a bakery, you should keep a stock of flour, eggs, butter, and sugar for your business use and a separate stock for your own kitchen.
However, for some bigger-ticket items, this simply isn’t possible. A lot of entrepreneurs can’t afford to buy a separate car just for their business (Kudos if you can, though–go for it!). In these cases, it’s important to track your business’s usage of your personal items. You can often deduct these expenses on your taxes, and to do so compliantly, you’ll need a record of your usage.
5) Imagine that Your LLC’s Funds Belong to Someone Else
All LLC members should treat the business’s funds like someone else’s property. If you worked at a gift shop, you wouldn’t take $200 to pay your phone bill, right? If you did, you’d lose your job!
The same applies for LLCs, especially single-member LLCs. Even though starting an LLC allows you to be your own boss, this doesn’t mean you can simply take funds as you please. Technically, those funds don’t belong to you; they belong to the business. An LLC is a legal entity that “owns” things, including money.
This distinction is important, and it differs from a sole proprietorship. If you aren’t incorporated, any profit you make belongs to you, regardless of how you get it. But by incorporating as an LLC, the profits become the property of the business.
Of course, you can give yourself your fair share of the business profits in the form of distributions. But these should be regular, official transfers that you document, almost like your paycheck. Even if you encounter an emergency expense at home, you should avoid spending the LLC’s funds to cover it.
Multi-member LLCs are less likely to encounter these problems, but they should still be careful.
6) Maintain This Separation by Running a Compliant Business
While this step doesn’t “separate” your assets, it is important to protect the separation that you’ve established in Steps 1-5. You can do so by operating a compliant, legal business. If you don’t, you risk losing your personal asset protection.
The requirements to maintain compliance vary from one state to another, but there are several common expectations. This includes filing annual reports, paying taxes correctly and on time, obtaining and renewing any business licenses, keeping a registered agent, and more.
For more information on your state’s requirements for compliance, you should contact your Secretary of State.
Separating your personal assets from your LLC’s assets is non-negotiable. But with the six steps we’ve covered in this guide, you’re ready to get started.
That said, this guide is just a helpful starting point; businesses all have their own unique needs. If you have further questions about separating your assets, we strongly recommend that you seek legal advice.